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GLENDALE, CA (Dec. 18, 1998) -- A few weeks ago, in my last turn at bat in this column, I closed out the week with an examination of our number-one performer, the model of a Rule Maker company, a little software company headquartered in Redmond, Washington known as Microsoft(Nasdaq: MSFT). When I wrote that column, I really did not think I'd be writing about Microsoft again so quickly. After all, I was pretty sure that Rob was going to have something to say after I did, and I believe he did write a column or five in response, so normally it would be time to go on to other matters.

However, I have at least three good Foolish reasons to return to Microsoft today:

There really has been significant news since my last column, and it I want to explore how this news affects what I said last month.

Anyone who is following both our Rule Maker Portfolio and the Rule Breaker Portfolio must have noticed that we are absolutely getting KILLED this year. The only one of our companies whose performance even APPROACHES either of their Internet powerhouses in the Rule Breaker Port this year is Microsoft. So we'd better know all we can about it!

Returning to the risk topic theme I've been exploring all week, I can say that I'm extremely confident that Microsoft will be around for the indefinite future. Someday the government may brake it up into pieces, like AT&T and Standard Oil before it, but the odds of a long-term shareholder losing his investment through the company's eventual bankruptcy are practically nil. For those of you who may be new to this column, this confidence comes from: a) $17 billion in cash and securities on the balance sheet, b) no debt, and c) two separate markets in which Microsoft is the unquestioned gorilla.

Now on to the news. As you probably have read by now, on November 24 America Online(NYSE: AOL) announced that it would be acquiring Netscape(Nasdaq: NSCP) for about $4.2 billion. At the same time, AOL was entering into a strategic development and marketing alliance with Sun Microsystems(Nasdaq: SUNW). Microsoft was not directly involved in this deal, but it certainly was indirectly involved.

The common wisdom is that the combination of AOL and Netscape, with a little help from Sun on the side, will make it very difficult for the Department of Justice (DOJ) to prevail in its current anti-trust case against Microsoft. That case is all about how Microsoft is using its monopoly power to make Netscape's Internet Navigator of no value, and that becomes a little difficult to argue when AOL is willing to pay $4 billion for the company. So difficult, in fact, that one of the states has already pulled out of the government's case against Microsoft.

Tom pointed out almost two months ago when Microsoft first released its first quarter fiscal 1999 earnings that, in the absence of the lawsuit, Microsoft should be trading at all-time highs. I note that Microsoft's stock did move up to its all-time high on November 24, and it hasn't really looked back since.

In addition, I see several more effects that the AOL/Netscape deal will have on the current lawsuit:

First, this is a sign that DOJ has done its job REGARDLESS of the final outcome of the case. I'm about as keen on Microsoft as anybody I know, and even I will admit that some of its past business practices have been a little, shall we say, heavy-handed. As a result, many software companies have been afraid to engage in behavior that they felt might "provoke Microsoft." Whether or not this fear was justified, it was nonetheless real, and the AOL/Netscape deal is an example of the kind of deal that might not have been done because of fear of Microsoft's retaliation.

Second, going forward, on the Internet, Microsoft is clearly not in the number one position. Microsoft will have to provide customers with better value at its Internet sites than the top provider (AOL) if it wants to keep any Internet presence at all. In others words, Microsoft will have to win a fair fight. In this battle, I'm not too worried about our number one company. Microsoft is still not number one with Money, but it has taken it from nothing to a credible challenger to Quicken. The Office productivity suite did not start out number one either, but it dominates today. In addition, although I'm not an expert in it myself, I'm told that Microsoft's SQL Server is making great progress in the database area. All of these are examples of where Microsoft has won in the final battle that really counts -- the purchase decision by the customer.

Third, we will be looking at a company that has unquestioned gorilla power in two areas, budding gorilla power in a third area (SQL Server), and hopefully forthcoming gorilla power in a fourth area (Windows CE). Plus, the company's worst enemy (the DOJ) has been throttled by the market. Moreover, if Microsoft wants to continue to market on the Internet, it's hard to see how AOL will stop it. Microsoft can always put links to its sites directly in Windows. Such a practice, which might have been illegal in the past, should be allowable OR EVEN ENCOURAGED now that AOL will be the dominant provider of access to the Internet. OK, I'm kidding about the DOJ encouraging Microsoft to do this, but DOJ may have a hard time stopping Microsoft if AOL really is number one.

Fourth, Sun and Oracle(Nasdaq: ORCL) announced on Monday that they are teaming up to provide companies with an alternative to Windows NT. I wish them the best. The downside to this is that Sun and Oracle might cut into the Windows monopoly. On the other hand, this is one reason why the DOJ should leave Microsoft alone. Personally, I think Microsoft has more to gain from this attack than it has to lose, but time will tell.

Last, but perhaps not least, Rob has mentioned that one of Microsoft's problems is that the company is too dominant, and as a result it will inevitably become complacent and stop innovating. If so, then perhaps this AOL/Netscape partnership is exactly what Microsoft needs. It could present a serious challenge to the company, at least in one area, and give Microsoft a chance to really knuckle down and create under fire in a way that has been lacking for a while.

Unfortunately, there is one problem with all of these great results from the AOL/Netscape deal. There has been some speculation that the deal itself won't work out very well due to a culture clash between AOL and Netscape. I'm in no way qualified to comment on whether or not the AOL/Netscape merger will work, all I can say is that if it doesn't, then things can be expected to go back to the way they were before. For a Rule Maker investor, that sounds like a win-win situation to me.

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